CNBCfix review: Steve Cortés’
Against the Herd trumpets the
high points of low expectations

          Posted: Monday, December 12, 2011

Times are so tough for retail stock investors, get-rich-quick books are being superseded by stop-losing-money books.

The latter approach is CNBC commentator Steve Cortés' choice in Against the Herd, a grim take on global economics that actually feels like a pep talk.

The premise is that at least 6 investing themes have drawn a herd, and following them is financial folly. But 4 do not seem particularly controverisal. And only 2 of his counter-trades — buy Treasurys and the U.S. dollar — are really emphatically stressed. This is no untold-wealth treatise; Cortés writes in the introduction, "This book is designed to target unrecognized dangers and help you avoid financial pain," with one admonition being to avoid the stock market entirely — a remarkably candid self-assessment from a television stock-picker.

Hotshots who fail to find that theme sexy enough are missing some thoughtful work. Cortés peppers his somewhat dry statistical conclusions with refreshing commentary on stock market expectations, straightforward reflections on his own experiences and endless pop culture analogies that, impressively, come across as fresh and funny, not trite. There is, unfortunately, an overreliance on quoting figures such as Thomas Watson, Adam Smith and Tom Wolfe — especially Wolfe — as evidence in favor of current trading positions.

Ironically, for the vast majority of readers, the most important chapter is one Cortés prefers to tuck away, the 5th out of 6. It's not hard to see why. Despite picking stocks on television, Cortés urges readers — with only small exceptions — to completely avoid the stock market. He says the volatility and likelihood of principal loss are too much for most retail investors. He does write that highly skilled and/or professional investors, or those with extremely deep pockets and deep time frame (10 years), can succeed. This is a harsh extension of the post-2008 trend in investing books, that "buy and hold" is dead and that passive investors can no longer expect to get ahead (if they even were before) with unthinking regular investment.

Some will rightly wonder how Cortés can make stock calls for the small investor on a show called "Fast Money" with such a negative view of stock investing. To his credit, long dollar and long Treasurys have been a staple of his CNBC commentary. And, as he concedes in Herd, "I readily admit that stock investing can be terrific fun," which is basically why so many people do it — and watch people on TV talk about it — against overwhelming evidence to the contrary.

The book's biggest shortcoming is Cortés' deft avoidance of backing himself into a time frame. A second is the non-distinction between its bookend theories, 1 and 6, as to how one shorts "China" without shorting the "U.S." at the same, and Cortés' lip service to opposing voices.

His signature call is that China, through inefficient central planning that has already misfired and a surprisingly declining population, is sitting on a massive housing and infrastructure bubble. His strategies for playing this include shorting the Aussie dollar, owning U.S. Treasury bonds, and to "avoid or short" companies such as BHP Billiton, Caterpillar, GM, Union Pacific and United Technologies. Yet CAT, GM (to some extent), UNP and UTX are bellwether American companies whose shares trade in certainly as much if not more direct correlation to U.S. economic expectations than China's ... and shorting those companies might also be recommended as a thesis for capitalizing on American economic decline. The inference being, Cortés' singular outlook for China (to the extent "China" is a singular notion) could be irrelevant to the financial strategy he recommends for a U.S. market with other problems. China isn't the lone headwind he identifies. He paints a grim, years-long slog through housing that will continue to be anchor for growth and presumably stock markets.

Stating an opposing view and explaining why it is wrong enhances credibility. With maybe a couple exceptions, Cortés isn't interested in giving the other side much of a say. He faults a New York Times article on a Chinese mall, singles out 3 academic cheerleaders of Japan circa 1980s, mentions Fareed Zakaria, and criticizes Ben Bernanke's quantitative easing. If the "herd" believes China and gold are so great, surely there must be decent reasons for that conclusion.

Herd is clearly at odds with a recent book by one of Cortés' CNBC colleagues, Zachary Karabell, who writes in Superfusion (also reviewed on this site) that the United States and China are in a permanent embrace, and the question is whether people will build on it or reject it. Karabell, who spars with Cortés a couple times a week around lunchtime on CNBC, might or might not modestly agree with Cortés that Superfusion represents the prevailing Western "herd" view of Chinese potential. Karabell clearly would not agree with this argument from Cortés: "America has never, relative to the rest of the world, held a more powerful position economically, militarily and politically as today."

Superfusion makes an interesting case that as technology and transportation break down barriers, countries' fortunes are increasingly intertwined with other countries, and that multinationals will no longer be identified as "American" or "German" companies, but global efficiency providers.

This argument matters to Herd, because Cortés decidedly pigeonholes nation-states into competing teams, suggesting the "United States," not select companies or industries, is the long-term winner, and "China" and "Japan" are 2 of the losers. Curiously, Cortés' signature trade — long U.S. Treasurys — is the premier investing position of China. Yet while he recommends Americans own them, he suggests they are an albatross for Beijing because of its massive exposure; "the truth is that the Chinese have the problem regarding Treasuries." Meanwhile much production of the goods Americans purchase has been outsourced to China and elsewhere. Are Americans winning when they buy a GM car mostly built in Detroit, or when they buy Chinese-made products at Wal-Mart, a favorite stock of Cortés? Employment trends are not central to this book. The implications are that Americans benefit from U.S. entrepreneurial greatness in 2 ways; by having guaranteed access to the product and employment potential. Others may argue, quite reasonably, that those advantages are declining, not growing. Cortés tells early in the book of dining at Sparks in Manhattan with Wall Streeters whose children were all learning Mandarin. His embarrassing suggestion to this crowd — not that Americans assist the rest of the world in learning English, which his book certainly implicitly suggests is the future — is that these kids would be better off learning Spanish, "given our Southern border and the demographic trends within America itself." According to Cortés, Americans presumably will take satisfaction in their deflationary-flirting environment all the more knowing the Chinese are feeling it worse. Globalization is beyond the scope of this book's argument, yet one has to wonder how it possibly can be.

While sidestepping globalization, Cortés makes a number of population observations that lead one to sadly conclude: People in the most advanced nations are not having enough children. But these observations are notably dispassionate, almost in fact a rallying cry for America's ongoing strength.

The United States, "which stands alone among industrial societies," is the exception to the population-decline trend, Cortés writes, but barely — a "replacement" birth rate of 2.1 per woman, while recent news on the subject suggests we're going the wrong direction.

While cheering the extent of U.S. population replenishment as part of his credible pro-America thesis, Cortés opts against attempting a Malthusian critique that is wanting here. He has identified so many dots but doesn't connect them, perhaps how America might have experienced its own population/financial-market burp with Baby Boomers and their exposure to 401(k) accounts. Readers must infer that societies advance, and for whatever reasons the most advanced people in the world choose to limit their offspring, and the remaining people age into an economic paradigm requiring massive, eventually crushing debt to uphold the lifestyle they forged. That's evidently a different book, one not subtitled "6 Contrarian Investment Strategies You Should Follow."

One of the advantages for this book — though not necessarily for its readers — is that its themes are extremely long-term; it won't be rendered irrelevant by a month's worth of contrary financial market activity. But this game plan puts Cortés in something of a squishy time frame. At what point should his theories be considered validated or busts? Kyle Bass, a bearish voice Cortés endorses, told CNBC viewers in August 2010 of a dire stock market scenario that was followed by months of gains. If gold and China perform well in 2012, that would not defeat Cortés message, but if they're still strong at the end of 2013, then ... probably the book will not be one of the hottest sellers at

Furthermore, Cortés seems to underestimate the available time frame for most seriously cashing in on these positions. If these collapses don't happen fairly soon, the book might be considered fruitless. He concedes that in 1 area, housing, you're already kind of late; "admittedly, betting against housing now in 2011 will not yield anywhere near the historic returns garnered by early visionaries." He illustrates the Nikkei's performance since 1984 and notes, "In 1990 alone, the Nikkei fell almost 40 percent, and declined 60 percent from its peak within two years." But those who started shorting in 1987 had to endure hellish losses before ultimately settling for some kind of break-even level by the mid-'90s. Short the Nasdaq after Greenspan's "irrational exuberance"? Right call ... 3 years later. Cortés' unwillingness to call tops buys time for this work but deprives readers of a critical measuring stick, without which they can still lose massively by being right.

Cortés devotes healthy space to Bill Belichick's decision not to punt on 4th down vs. the Colts, defending this decision with study conclusions that NFL teams should punt far less than they do. Cortés does adequately identify the risk/reward of going for the 1st down, but misses 2 huge reasons why it made sense for Belichick: His defense was gouged and gassed that quarter, and potentially giving the Colts a very short field would likely ensure the Patriots got the ball back quickly ... except Patriot defenders blew it by tackling the Colts' Joseph Addai at the 1-yard line rather than letting him score and receiving the kickoff with time to win. Being half-contrarian is probably a bad idea.

Is Cortés motivated by something more than sparing readers financial pain? Evidently, yes. Barely into the introduction, he writes, "More than for any other purpose, I write this book hoping it will empower the reader to wisely discern the motivations of the media and Wall Street, and to realize how important it is to truly think." Yet Cortés is a contributor to CNBC, and in his book, with only a couple exceptions, the mainstream media and Wall Street Journal escape unscathed, so one can only wonder how the "media" has enabled or created the China, Japan and gold bubbles he sees.

With so much convincing economic and demographic data elsewhere in the book, his claim near the conclusion, without much foundation, of the purported "near unanimity with which the media believe in the decline of America" is best described as specious.

How sophisticated must a reader be to appreciate Cortés' arguments? In the most eye-opening chapter, using a devastating quote from James Altucher, Cortés posits that the non-professional should avoid stocks because he or she can't handle volatility and has little chance against stock market pros; the latter group is apparently not his audience. Against the Herd seems targeted for the retail investors who watch CNBC but is also built tough enough, reliant on stats and precedents, for the professional critics bound to take exception to a few of the claims.

It's a book, not a TV show or stock chart. Cortés' writing is capable and sprightly. Yet it too often succumbs to the cliches and flatness of business theory. Terms such as infrastructure, technology, innovation abound. Almost every paragraph contains extra words and clauses that need to go. Some form of "inherent," one of the most useless words, appears at least 19 times; "concomitant" about 5. Cortés is trying to find middle ground for satisfying both CNBC-watching small investors who listen to his picks and stuffy academics who might challenge his conclusions. A tougher edit would determine this book is overdone on citations and terminology, a good example of how many writers should assume they're just doing Facebook posts, and let it flow.

There's a hard-to-define line where one's professional opinions cross over from sound assessments to obnoxious wisdom-dispensing. Cortés only really flirts with this late, when asserting, "I believe this present economic dislocation from the credit crisis is sure to result in actual armed conflict on a scale unseen in decades. Precisely where and when ... remains very hard to predict."

Readers will rightly wonder, 'Even if this guy's right, what does it do for me?' Presumably they will do a little better than a CD in a risk-off environment. Most importantly to Cortés, they would not lose money in such a scenario, though it must be noted that people shorting CAT and going long dollar in a risk-on era are likely to get seriously burned. Still, Cortés is conservative enough that he doesn't even suggest shorting gold or housing stocks despite those sectors constituting 2 of his 5 negative themes. There is impressive restraint throughout and thoughtful observations about people distracting themselves with needless stress of their brokerage accounts; as much as anything, there's an overarching caution to avoid getting carried away with the financial markets.

This is no Dr. Doom. Cortés somehow paints frighteningly bearish scenarios with appealing optimism. His rationale is that the world reaps what it sows, and those doing it right — his target American audience — will weather the storm and ultimately profit handsomely. There's no gimmick here. For selling books, it's undeniably a bold call — predicting tough times, casting doubt on the writer's own industry and urging readers to set their investment expectations low. On top of that, the world's most advanced societies are running out of people at catastrophic rates. Think positive — at least, don't say you weren't warned.

Against the Herd: 6 Contrarian Investment Strategies You Should Follow (2011)

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